Portfolio & Market Review: April 2019
The month of April was a continuation of the strong market momentum we have experienced since the start of the year. Stocks around the world edged higher, and the MSCI All Country World Index increased 3.2%, just shy of the peak it reached last fall. US equities had a strong month with gains of over 4%. They eclipsed their September 2018 peak and set a new all-time index high. Global growth optimism was the main story behind stock prices, as new economic data, accommodating rhetoric from the world’s central banks, and receding geopolitical risk further lowered the likelihood of a near-term recession. Additionally, inflation data continued its trend of undershooting central bank targets, which tempered volatility in the bond markets. The lack of inflation and subsequent “dovish” stance among the world’s central banks has created a “Goldilocks” environment wherein global equities rally while global interest rates remain low.
In the US, the Q1 earnings season got off to a solid start as estimates beat bearish expectations. It was a widely held opinion that earnings were set to sharply decline in the first quarter; however, so far companies have delivered positive surprises giving way to renewed confidence that this bull market in equities has more room to run. The positive earnings surprises were supported by a strong Q1 GDP growth estimate of 3.2% annualized, along with improvements in durable goods orders, housing, retail sales, and payroll gains.
Beyond the US, near-term growth prospects look tentative but carry more upside. In the Eurozone, the manufacturing PMI survey delivered its first month-on-month increase since last July. The most recent reading of 47.8 suggests that the Eurozone economy is improving but remains in contractionary territory. Another positive was the employment component that remains above 50 indicating that the slowdown in activity has not had a negative impact on labor. Meanwhile, in the UK, the Brexit deadline was pushed out again from April 12th to October 31st. The outcome for Brexit remains uncertain; however, most market participants believe the potential for near-term growth shocks coming from the UK is less likely, leading to additional support for global equity and credit markets.
In the emerging world, equities returned 2% led by China, whose economic activity surprised on the upside. The improvements in China suggest their monetary and fiscal stimulus is gaining traction and should be beneficial to global growth. However, as a whole, emerging markets continue to face near-term challenges stemming from rising oil prices and a strong dollar.
Returns from global bonds were muted during the month as bond markets continued to trade in a relatively tight range on the heels of disappointing inflation numbers in the US, Europe, and Australia. In the US, the benchmark 10-year Treasury yield increased slightly during the month from 2.41% to 2.50%.
The solid start to the Q1 corporate earnings season, along with the prospects for continued economic improvements in China and Europe, should provide a good backdrop for equities as we head into the summer months. In addition, low interest rates and an accommodative Federal Reserve Bank should keep recession risk low for the remainder of this year. As we have discussed in previous newsletters, the earnings picture remains in focus. The rally in stocks continues to be driven by multiple expansion (i.e. the “P/E” ratio has increased led by the “P” rather than the “E”), and if earnings growth does not continue to improve, there could be limited upside from here.
On the trade front, perceived improvements in the US and China trade discussions gave reason to be optimistic during April. However, during the first week of May, President Trump decided to up the ante by threatening higher tariffs in response to China’s unwillingness to negotiate key parts of the agreement. As we have come to see, any increase in hostile trade talks between the world’s two largest economies will likely lead to increased market volatility. It is important to keep in mind that it is in the best interest of both the US and China to reach a deal and that these tensions have been present for the last few years and are bound to flare up from time to time.
Model Portfolio Update
There were no model changes made during the last quarter.